San Francisco Voters Approve Tax Hike

San Francisco voters approved the largest tax increase in the history of the city, to double spending on the city’s growing homeless population.

November ballot Proposition C, placed through a petition by citizens, raises the city’s gross receipts tax on companies with more than $50 million in revenues by an average of 0.5 percentage points. The new tax rates will vary by business sector and will be levied on top of previous gross receipts taxes ranging from 0.16 to 0.65 percent.

The tax is expected to raise up to $300 million per year in additional revenues, enough to provide housing for 5,000 people, 1,000 shelter beds, and mental health services, according to supporters of the law. The city currently spends more than $380 million a year to address homelessness, more than $50,000 for each of the estimated 7,500 homeless people in the city.

Continual Cost Increases

Chris Talgo, an editor for The Heartland Institute, which publishes Budget & Tax News, says Prop C is a misguided policy which is going to make the city’s homeless situation worse, not better.

“The people of San Francisco should have considered other options to provide a social safety net for those people who are truly in need, as opposed to incentivizing more homeless people to come to their city,” Talgo said.

Since San Francisco began tracking the local homeless population in 2005, the city has increased its budget for services to the homeless almost every year, says Talgo.

“Over the last 10 years, San Francisco has increased spending on the homeless every single year, and the problem has gotten worse,” Talgo said. “I’d like to know how doubling the amount of money spent is going to solve this problem.

Stagnant Housing Supply

Adam B. Summers, a research fellow at the Independent Institute, says homelessness is a serious problem which the San Francisco city government has been making worse.

“There is no doubt homelessness is a serious issue in San Francisco, and has negatively affected the quality of life in the city,” said Summers. “But throwing substantially more money at the problem might not be the best solution.”

The homeless problem is worsened when local governments restrict the supply of affordable housing, says Summers.

“The growth of high-paying jobs in the city can certainly raise housing costs, but this is mitigated when supply is allowed to rise to meet the increased demand,” said Summers. “San Francisco has notoriously restricted housing supply through stringent rent control and other anti-development policies, however.

“Between 2010 and 2015, San Francisco added only one home for every eight new jobs created, while average rents increased 43 percent,” Summers says.

Allowing the market to function would help alleviate San Francisco’s housing affordability problem, says Summers.

“Getting the government out of the way and merely allowing supply and demand to function unhindered in a free market would do much more to create affordable housing than hundreds of millions of taxpayer dollars,” Summers said.

Mayor Opposed It

San Francisco Mayor London Breed opposed Prop C, saying the taxes would damage the local economy, the additional services and housing would attract homeless people from neighboring cities, and the measure lacked accountability for the funds spent.

“New taxes will decidedly harm our local economy,” said Breed. “The City Economist’s report estimates that Prop C will cause up to a $240 million loss from our city’s GDP every year for the next 20 years.”

Proponents of Prop C claimed the tax would be paid by only the top 1 percent of companies, but they failed to acknowledge those employers provide a much larger percentage of the jobs in the city, says Summers.

“City Controller Ben Rosenfield's analysis of the measure noted the 300 to 400 businesses affected by the tax “comprise approximately 15 to 20 percent of the city's job base and pay approximately 40 percent of the city's business taxes,” said Summers.

The city's Office of Economic Analysis notes the businesses affected already pay close to $2,500 per employee per year in business taxes to the city, which will increase to more than $3,700 per employee with the new homeless tax. This, the agency said, will “make business taxes nearly as big an impediment to growth as housing and transportation already are.”

“Of course, these tax increases will largely be passed on to consumers, raising the cost of living further,” Summers said.

Companies Fleeing

Although the Bay Area has many natural advantages in competition for businesses, especially for tech firms, companies must deal with a stifling business climate in California, and particularly in San Francisco, says Summers.

“There is the prospect some companies might consider this latest tax increase the last straw and simply refuse to pay, either by relocating out of the city or directing their expansions elsewhere,” Summers said.

“Companies like Bechtel, Bare Escentuals, and Core-Mark have already decided to leave for greener pastures in recent years, while others like Charles Schwab, Lyft, Slack, and Square have chosen to grow their businesses out of state,” said Summers.

“Punishing businesses with higher taxes will only lead to further job losses and diminished economic growth,” said Summers.